Lexmark Newsroom

1Q15

1Q14

    GAAP

$852

$878

    Adjustments

3

3

    Non-GAAP¹

$855

$881

EPS

1Q15

1Q14

    GAAP

$0.32

$0.46

    Adjustments

0.49

0.46

    Non-GAAP

$0.81

$0.92

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

March 31

2015

2014

Revenue:

Product

$     714.7

$     763.6

Service

137.3

114.1

Total Revenue

852.0

877.7

Cost of revenue:

Product

428.4

445.6

Service

93.6

83.9

Restructuring-related costs

0.1

6.6

522.1

536.1

Gross profit

329.9

341.6

Research and development

77.7

79.0

Selling, general and administrative

210.2

207.1

Restructuring and related (reversals) charges

(0.2)

1.6

Operating expense

287.7

287.7

Operating income

42.2

53.9

Interest expense (income), net

7.7

7.9

Other expense (income), net

0.8

0.7

Earnings before income taxes

33.7

45.3

14.0

16.0

Net earnings

$       19.7

$       29.3

Net earnings per share:

Basic

$       0.32

$       0.47

Diluted

$       0.32

$       0.46

Shares used in per share calculation:

Basic

61.3

62.1

Diluted

62.4

63.4

Cash dividends declared per common share

$       0.36

$       0.30

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

March 31

December 31

2015

2014

ASSETS

Current assets:

Cash and cash equivalents

$         369.1

$         309.3

Marketable securities

428.0

624.6

Trade receivables, net

394.6

421.6

Inventories

254.5

253.0

Prepaid expenses and other current assets

271.4

225.8

Total current assets

1,717.6

1,834.3

Property, plant and equipment, net

770.8

786.1

Goodwill

597.2

605.8

Intangibles, net

249.7

264.3

Other assets

130.1

142.6

Total assets

$      3,465.4

$      3,633.1

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$         531.3

$         532.8

Accrued liabilities

554.5

678.5

Total current liabilities

1,085.8

1,211.3

Long-term debt

699.7

699.7

Other liabilities

439.1

458.8

2,224.6

2,369.8

Stockholders' equity:

Common stock and capital in excess of par

965.0

957.2

Retained earnings

1,401.0

1,404.1

Treasury stock, net

(1,036.4)

(1,006.4)

Accumulated other comprehensive loss

(88.8)

(91.6)

Total stockholders' equity

1,240.8

1,263.3

Total liabilities and stockholders' equity

$      3,465.4

$      3,633.1

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Net Earnings (In Millions)

1Q15

1Q14

GAAP

$             20

$             29

Restructuring charges and project costs 

2

9

Acquisition and divestiture-related adjustments

29

20

Non-GAAP

$             51

$             58

EBITDA and Adjusted EBITDA(In Millions)

1Q15

1Q14

GAAP Net Earnings

$             20

$             29

Net interest expense (income)

8

8

Provision for income taxes

14

16

Depreciation and amortization

66

66

EBITDA

$            107

$            119

Restructuring charges and project costs

2

9

Acquisition and divestiture-related adjustments

14

8

Adjusted EBITDA

$            123

$            137

Earnings Per Share

1Q15

1Q14

GAAP

$           0.32

$           0.46

Restructuring charges and project costs

0.02

0.14

Acquisition and divestiture-related adjustments

0.47

0.32

Non-GAAP

$           0.81

$           0.92

Earnings Per Share Guidance

2Q15

2Q14

GAAP

 $0.07 - $0.17 

$           0.59

Restructuring charges and project costs

0.10

0.13

Acquisition and divestiture-related adjustments

0.58

0.30

Actuarial gain on pension plan

-

(0.03)

Non-GAAP

 $0.75 - $0.85 

$           0.99

Earnings Per Share Guidance

2015

2014

GAAP

 $1.42 - $1.62 

$           1.25

Restructuring charges and project costs

0.50

0.52

Acquisition and divestiture-related adjustments

1.68

1.36

Actuarial gain on pension plan

-

0.91

Non-GAAP

Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.

Totals may not foot due to rounding.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Revenue (In Millions) *

1Q15

1Q14

GAAP

$            852

$            878

Acquisition-related adjustments (1)(2)

3

3

Non-GAAP

$            855

$            881

Higher Value Solutions Revenue (In Millions) **

1Q15

1Q14

GAAP

$            272

$            240

Acquisition-related adjustments (1)(2)

3

3

Non-GAAP

$            275

$            244

Core Revenue(In Millions) ***

1Q15

1Q14

GAAP

$            852

$            878

Inkjet Exit Revenue

(48)

(73)

Acquisition-related adjustments (1)(2)

3

3

Non-GAAP

$            807

$            808

Trailing 4 quarters

Core Revenue (In Millions) ***

1Q15

1Q14

GAAP

$         3,685

$         3,661

Inkjet Exit Revenue

(232)

(356)

Acquisition-related adjustments

17

16

Non-GAAP

$         3,470

$         3,321

Enterprise Software Revenue (In Millions) ****

1Q15

1Q14

GAAP

$             86

$             61

Acquisition-related adjustments (1)(2)

3

3

Non-GAAP

$             90

$             64

Deferred Software Revenue(In Millions) *****

1Q15

1Q14

GAAP

$            118

$             88

Acquisition-related adjustments

12

8

Non-GAAP

$            130

$             96

Trailing 4 quarters

Annuity Revenue (In Millions) ******

1Q15

1Q14

GAAP

$         2,409

$         2,304

Acquisition-related adjustments

10

6

Non-GAAP

$         2,419

$         2,310

Gross Profit (In Millions)

1Q15

1Q14

GAAP

$            330

$            342

Restructuring charges and project costs (3)(4)

0

7

Acquisition-related adjustments (1)(2)

17

13

Non-GAAP

$            347

$            362

Gross Profit Margin (%)

1Q15

1Q14

GAAP

38.7%

38.9%

Restructuring charges and project costs

0.0%

0.7%

Acquisition-related adjustments

1.9%

1.5%

Non-GAAP

40.5%

41.0%

Operating Income  (In Millions)

1Q15

1Q14

GAAP

$             42

$             54

Restructuring charges and project costs (3)(4)

2

12

Acquisition and divestiture-related adjustments (1)(2)

37

26

Non-GAAP

$             81

$             92

Operating Income Margin (%)  

1Q15

1Q14

GAAP

5.0%

6.1%

Restructuring charges and project costs

0.2%

1.4%

Acquisition and divestiture-related adjustments

4.3%

3.0%

Non-GAAP

9.5%

10.4%

Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.

Totals may not foot due to rounding.

*

Year-to-year Revenue growth was approximately -3% on a GAAP basis and -3% on a non-GAAP basis. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 13% on a GAAP basis and 13% on a non-GAAP basis. Higher Value Solutions Revenue as a percentage of total revenue was 32% on a GAAP basis and 32% on a non-GAAP basis for the first quarter ending March 31, 2015. Higher Value Solutions Revenue as a percentage of total revenue was 27% on a GAAP basis and 28% on a non-GAAP basis for the first quarter ending March 31, 2014. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

***

Year-to-year Revenue growth was approximately -3% on a GAAP basis, 0% excluding Inkjet Exit and acquisition-related adjustments and 6% on a non-GAAP basis at constant currency. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

****

Year-to-year Enterprise Software Revenue growth was approximately 42% on a GAAP basis and 40% on a non-GAAP basis. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

*****

Year-to-year Deferred Software Revenue growth was approximately 34% on a GAAP basis and 35% on a non-GAAP basis. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

******

Year-to-year Annuity Revenue growth for the trailing four quarters was approximately 5% on a GAAP basis and 5% on a non-GAAP basis. Annuity Revenue for the trailing four quarters as a percentage of revenue was 65% on a GAAP basis and 70% on a non-GAAP basis, excluding Inkjet Exit and acquisition-related adjustments for the first quarter ending March 31, 2015. Annuity Revenue for the trailing four quarters as a percentage of total revenue was 63% on a GAAP basis and 70% on a non-GAAP basis, excluding Inkjet Exit and acquisition-related adjustments for the first quarter ending March 31, 2014. Financial results in the first quarter of 2015 include those of ReadSoft acquired in the third quarter of 2014, those of GNAX Health acquired in the fourth quarter of 2014 and those of Claron subsequent to the date of acquisition.

⁽¹⁾ 

Amounts for the three months ended March 31, 2015, include total acquisition and divestiture-related adjustments of $36.7 million with $3.2 million, $13.3 million, $0.2 million and $20.0 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively.

⁽²⁾ 

Amounts for the three months ended March 31, 2014, include total acquisition and divestiture-related adjustments of $26.3 million with $3.1 million, $10.2 million, $0.2 million and $12.8 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $11.6 million of acquisition-related expenses and $1.2 million of divestiture-related expenses.

⁽³⁾ 

Amounts for the three months ended March 31, 2015, include total restructuring charges and project costs of $1.9 million with $0.1 million and $2.0 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $(0.2) million in Restructuring and related (reversals) charges.

⁽⁴⁾ 

Amounts for the three months ended March 31, 2014, include total restructuring charges and project costs of $11.9 million with $6.6 million and $3.7 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $1.6 million in Restructuring and related (reversals) charges.

Appendix 1

Note:

Management believes that presenting non-GAAP measures is useful because they enhance investors' understanding of how management assesses the performance of the Company's businesses. Management uses non-GAAP measures for budgeting purposes, measuring actual results to budgeted projections, allocating resources, and in certain circumstances for employee incentive compensation. Effective first quarter 2015, the Company is using a constant non-GAAP tax rate, which management believes reflects the long term average tax rate based on our international structure and geographic distribution of earnings. Adjustments to GAAP results in determining non-GAAP results fall into the categories that are described below:

1) Restructuring charges and project costs
In recent years, the Company has initiated restructuring plans which have resulted in operating expenses which otherwise would not have been incurred. The size of these items can vary significantly from period to period, and the Company does not consider these items to be part of core operating expenses of the business.  Restructuring and related charges that are excluded from GAAP earnings to determine non-GAAP earnings consist of accelerated depreciation, asset impairments, employee termination benefits, pension and postretirement plan curtailments, inventory-related charges and contract termination and lease charges. They also include project costs that relate to the execution of the restructuring plans. These project costs are incremental to normal operating charges and are expensed as incurred, such as compensation costs for overlap staffing, travel expenses, consulting costs and training costs.

2) Acquisition and divestiture-related adjustments
In connection with acquisitions, management provides supplementary non-GAAP financial measures of revenue and expenses to normalize for the impact of business combination accounting rules as well as to exclude certain expenses which would not have been incurred otherwise.

a. Adjustments to Revenue
Due to business combination accounting rules, deferred revenue balances for service contracts assumed as part of acquisitions are adjusted down to fair  value. Fair value approximates the cost of fulfilling the service obligation, plus a reasonable profit margin. Subsequent to acquisitions, management adds back the  amount of amortized revenue that would have been recognized had the acquired company remained independent and had the deferred revenue balances not been  adjusted to fair value.  Management reviews non-GAAP revenue to allow for more complete comparisons to historical performance as well as to forward-looking  projections and also uses it as a metric for employee incentive compensation.

b. Amortization of intangible assets
Due to business combination accounting rules, intangible assets are recognized which were not previously presented on the balance sheet of the acquired  company. These intangible assets consist primarily of purchased technology, customer relationships, trade names, in-process R&D and non-compete  agreements. Subsequent to the acquisition date, some of these intangible assets begin amortizing and represent an expense that would not have been  recorded had the acquired company remained independent. The total amortization of the acquired intangible assets varies from period to period, due to the mix in  value and useful lives of the different assets. For the purpose of comparing financial results to historical performance as well as for defining targets for employee  incentive compensation, management excludes the amortization of the acquired intangible assets on a non-GAAP basis.

c. Acquisition and integration costs
In connection with its acquisitions, the Company incurs expenses that would not have been incurred otherwise. The acquisition costs include items such as  investment banking fees, legal and accounting fees, and costs of retention bonus programs for the senior management of the acquired company. Integration costs  may consist of information technology expenses including software and systems to be implemented in acquired companies, consulting costs and travel expenses as well as non-cash charges related to the abandonment of assets under construction by the Company that are determined to be duplicative of assets of the acquired  company and non-cash charges related to certain assets which are abandoned as systems are integrated across the combined entity. Acquisition and integration expenses also include costs associated with the Company's rebranding announcement in April 2015 as well as related non-cash charges for the abandonment of certain obsolete marketing assets. The costs are expensed as incurred and can vary substantially in size from one period to the next. For these reasons, management excludes these expenses from non-GAAP earnings in order to evaluate the Company's performance on a continuing and comparable basis.

d. Divestiture-related adjustments
In connection with divestitures, management provides supplementary non-GAAP financial measures of expenses to normalize for the impact of certain earnings and expenses which would not have been incurred otherwise. In 2013, the Company recognized a net gain on the sale of inkjet-related technology and assets, which consisted of a subsidiary, intellectual property and other assets, and transition services.  In addition, the Company has incurred costs related to the divestiture, such as employee travel expenses and compensation, consulting costs, training costs, and transition services. These costs are incremental to normal operating charges and are expensed as incurred. Management excluded the income and expenses from non-GAAP earnings in order to evaluate the Company's performance on a continuing and comparable basis.

3) Actuarial gain/loss on pension plan
Lexmark elected during the fourth quarter of 2013 to change its method of accounting for mark-to-market (MTM) asset and actuarial gains and losses for its pension and other postretirement plans to improve transparency of operational performance.  MTM is also a more preferable approach under generally accepted accounting principles. Under this MTM accounting approach, asset and actuarial gains and losses will be recognized in net periodic benefit cost in the period in which they occur, rather than being recognized in accumulated other comprehensive income and amortized over future periods. Lexmark management believes that it is appropriate to exclude MTM asset and actuarial gains and losses from non-GAAP financial measures due to the nature and underlying volatility of these gains and losses.  Further, management believes that MTM asset and actuarial gains and losses relate to market performance of assets, discount rates, and actuarial assumptions, which do not directly arise from the Company's core operations, and the exclusion of these items from non-GAAP financial measures facilitates meaningful comparison both across periods and among entities.
 

Effective this first quarter of 2015, Lexmark is using a constant non-GAAP tax rate of 30%, which management believes reflects the long-term average tax rate based on our global supply chain, including our geographic distribution of earnings. The long-term average rate is calculated after excluding the tax effect of the non-GAAP items described above. Further, the non-GAAP tax rate removes the variability introduced by discrete events such as tax law changes, tax authority settlements and other non-recurring items.  The Company believes the long-term non-GAAP tax rate eliminates the effects of non-recurring and period specific items which can vary in size and frequency, facilitating a meaningful comparison across periods.  This rate is subject to change over time for various reasons, including material changes in our geographic business mix, acquisitions and/or modifications to statutory tax rates.

In addition to GAAP results, management presents these non-GAAP financial measures to provide investors with additional information that they can utilize in their own methods of evaluating the Company's performance. Management compensates for the material limitations associated with the use of non-GAAP financial measures by having specific initiatives associated with restructuring actions and acquisitions approved by management, along with their budgeted costs. Subsequently, actual costs incurred as a part of these approved restructuring plans and acquisitions are monitored and compared to budgeted costs to assure that the Company's non-GAAP financial measures only exclude pre-approved restructuring-related costs and acquisition-related adjustments. Any non-GAAP measures provided by the Company may not be comparable to similar measures of other companies as not all companies calculate these measures in the same manner.